CalPERS Investments in China
Recent news stories have raised questions about CalPERS' stock investments in China and how those investment decisions are made. The facts below outline the process we use to make stock investments around the world, including in China, and the factors used in making those investments.
CalPERS has been investing in China for decades
We began investing in international stocks in the 1980s. Our pension fund has $200B invested in stocks around the world, including in China. We invest in nearly 50 countries, including the United States. Our global investment portfolio is necessary for the pension fund to meet its 7 percent investment return target to pay retirement benefits for our members for the long term.
How does CalPERS invest in international stocks?
We invest in international stocks using an index. In the financial world, indices are created to track publicly traded stocks, bonds, and consumer prices for common goods and services. Indices determine the universe of stocks an investor will invest in. Indices that are often referenced in the news include the Standard & Poor's (S&P) 500, an index that tracks the performance of stocks of 500 of the largest companies in the United States. We use the Morgan Stanley Capital International (MSCI) and and Financial Times Stock Exchange (FTSE) indices that are commonly used for investments outside of the United States.
How is an index created?
Indices are created through companies that are often referred to as index providers. Indices are constructed through a set of rules and methodologies. Index providers develop indices of companies that the U.S. Government says are permissible for investors to invest in. The Office of Foreign Asset Control (OFAC) has the responsibility for this listing and we're fully compliant.
Did CalPERS recently sell U.S. stocks to buy stocks in companies in China?
No. In 2019, FTSE made a change to include China A shares, increasing exposure to China in the index. MSCI also included China A shares and states on its website, "Inclusion of China A shares in the index might have also helped increase foreign institutional investors' participation in China's domestic equity market."
When an index is updated, we rebalance our portfolio accordingly. Rebalancing involves periodically buying or selling assets in a portfolio to mimic the index. In the fall of 2019, we rebalanced our portfolio, resulting in the removal of 143 stocks and the addition of 198 stocks. Nearly half of the companies added were Chinese companies given the changes made by the index providers to include China A shares. This was not an active decision made by us.
Are indices used by other institutional investors like CalPERS, including other U.S. pension funds?
Yes. According to a report released by Aon in October 2019, the indices "remain the most popular indexes for U.S. based institutional investors investing in overseas equity markets. Including an international equity option with a material allocation to emerging markets equities is considered best practice in the marketplace, exemplified by adoption among public plans, defined contribution plans, and target date funds." In fact, indices are often used to make investments in personal savings plans like 401k and other deferred compensation plans.
Did the CalPERS Chief Investment Officer (CIO) make decisions to invest in China?
No. The CalPERS Investment Policy for Global Equity (PDF) sets forth our investment beliefs and overarching investment purposes and objectives which call for investments in other countries to "provide exposure to economic growth." Furthermore, our investments made through an index are done passively. Passive investing is a buy-and-hold strategy for long-term investment horizons. At no time did CalPERS' CIO direct investments in China.
What is the role of the CalPERS Board in investment decision-making?
The CalPERS Board sets broad investment strategy and approves the asset allocation for the pension fund's investment portfolio. The board also approves investment policies, including the Global Equity investment policy, that sets forth passive investment management through the use of indices.